8 Considerations with Custom Farming Agreements

Tue, 2013-04-16 16:31

An alternative to leasing farmland is a custom farming agreement. In a typical custom farming agreement, the custom operator agrees to perform all the machine operations on the owner’s land in exchange for a set fee or rate. The landowner pays for all seed, fertilizer, chemicals, crop insurance and other input costs; receives the all grain produced and all eligible farm program payments on the land; and is responsible to store and market the grain.

Following are the average custom farming rates for 2013, based on the Iowa Farm Custom Rate Survey (includes tillage, planting and harvesting costs):

Corn: $126.65/acre (range = $85-175)

Soybeans: $112.40/acre (range = $68-165)

Small grain: $83.25/acre (range = $50-100)

One obvious advantage to the custom operator is that a custom farming agreement provides some extra farm income, with little or no additional operating capital or farm machinery investment. Fuel, lubrication and repairs are usually the only added costs. In addition, custom farming offers a fixed return per acre to the custom operator, and although there is some possibility of higher repair bills, this is minor compared with the price and yield risks typically faced by a farm operator in a normal cash rental contract. Of course, in a good year, profits from a custom farming agreement will be lower than most cash rental leases; however, in this era of much higher land rental rates there is much more risk to the farm operator with a cash lease as compared to a custom agreement with a landowner.

Landowners also find several advantages to a custom farming agreement. Landowners with small acreages can make most of the crop production and grain marketing decisions without the investment into a full-line of farm machinery. The landowner does not have to negotiate land rental rates or worry about collecting lease payments, since the owner receives all of the crop proceeds. The landowner does have to pay the farm operator an agreed upon per-acre fee for the custom farming services by specified dates. The landowner is considered to be the material participant for income tax purposes, and the landowner is typically entitled to all government farm program payments.

Key Considerations With Custom Farming Agreements

Although the concept of a custom farming agreement is simple, close communication between the custom operator and the landowner is essential. A written contract for the agreement should definitely be prepared that specifies the amount of payment by the landowner to the custom operator, and all other pertinent details. Following are some points to consider for custom farming agreement:

The agreement should specify the payment amount per acre that the landowner will pay the custom operator, and should list the payment dates.

There needs to be an accurate count on the number of acres that will be under the custom farming agreement for payment purposes, and so the farm operator can accurately plan tillage, planting and harvesting schedules.

The normal field practices to be included under the custom farming agreement should be listed (tillage, planting, weed control, harvesting, etc.). Typically, these agreed upon practices are part of the per-acre custom farming payment for the year that is negotiated between the custom operator and the landowner.

Additional tillage trips or replanting due to weather conditions or added spraying applications of chemicals – to control weeds, insects or diseases – that are provided by the custom operator are usually charged to the landowner at a custom rate per acre that is over and above the base custom farming rate. (Refer to the 2013 Farm Custom Rates sheet (pdf) for rates.)

Timing of planting and harvesting operations should be discussed and negotiated between the custom operator and the landowner prior to the growing season. This can become a tenuous issue, especially in years with challenging weather conditions.

The custom operator may be asked for advice by landowner regarding the seed corn hybrid or soybean variety to plant, fertilizer rates, chemical applications, levels of crop insurance coverage or grain marketing decisions. However, the final decisions on these items lie with the landowner, and the custom operator needs to be careful not to take responsibility for the final authority on those decisions.

Typically, the harvested grain of the landowner is delivered by the custom operator to a farm storage facility owned or rented by the landowner, or to an agreed upon area grain elevator, as part of the custom farming agreement. Any grain deliveries beyond the local area usually result in the landowner paying an extra custom rate charge for grain hauling. Also, if the landowner uses the custom operators grain drying and handling facilities, there is typically an added charge for these services.

For more details on custom farming agreements, the 2013 Farm Custom Rates and other farm machinery information, please refer to the Iowa State University Ag Decision Maker website.

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.